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N.C. landowners signing one-sided agreements with fracking companies

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Peggy Wyatt has lived along Steel Bridge Road for 50 years, and she can remember a time before the Sanford city limits were nearly on her doorstep.

Many years ago, she says, prospectors occasionally poked around looking for oil and gas below her 44-acre homestead. "But at that time it wasn't feasible to get it out," Wyatt says.

Now it is feasible—at least technologically. But there are serious environmental and legal concerns about fracking—a method of accessing natural gas that is trapped in tight rock several miles below the earth's surface.

This potentially destructive drilling method is still banned in North Carolina, although landowners are already signing leases with exploration companies in case lawmakers legalize it.

Drilling companies have struck one-sided deals with North Carolina landowners, say agricultural, energy and legal experts who have seen the contracts. These contracts promise to pay property owners bonuses and royalties far below rates commanded in other states. And, depending on the wording, property owners could be financially responsible for the costs of cleaning up environmental damage, fines for zoning and land-use violations and other legal fees—costs that could far exceed the royalty payments.

"The contracts are putting liabilities on landowners that the average person wouldn't know about," says Jordan Treakle, a field organizer for the nonprofit Rural Advancement Foundation International-USA. RAFI, which has an office in Pittsboro, is educating landowners about their rights. "People in North Carolina aren't getting a very good deal," Treakle says.

The North Carolina Geological Survey announced last week that shale deposits in the Sanford sub-basin beneath Chatham, Lee and Moore counties could provide enough energy for the state for 40 years. The study is awaiting verification from U.S. Geological Society and could arrive as early as July.

Geologists have long suspected that the state has fossil fuel resources. But within the last five years, new geologic information has piqued the interest of drilling and energy companies to come to North Carolina.

From March to June 2010, WhitMar Exploration, which has offices in Denver and Houston, signed agreements with at least 60 Lee County landowners, including Peggy Wyatt, allowing the company to drill on their land. WhitMar, which could not be reached for comment, has leases on about 6,000 acres in Lee County, according to memorandums of agreement filed with the county's Register of Deeds. (The contracts are not public record.)

Wyatt says two lawyers from WhitMar visited her at home last spring and gave her a contract to study. "I didn't have a lawyer look at it," she says. "We had done this some years ago the first time there was exploration in this area."

Wyatt says she and several family members reviewed the contract, and "we all agreed that it was what it should be."

Landowners in North Carolina and other states often don't consult attorneys about gas exploration agreements, leaving themselves vulnerable.

"People need to understand that once you sign that document you are bound to it. It's a significant undertaking," says Robert Moore, an Ohio attorney with experience in mineral rights issues. (His firm, Wright Law, also has a small office in Hillsborough.)

Moore says Wyatt's experience is common. "[The company] sends out a land man. They're the salesmen and they'll tell you it's the best lease in the world. That's business."

There are few attorneys in North Carolina who specialize in mineral rights, adds Brandon King, a zoning specialist with the N.C. Cooperative Extension, and many big firms "are already taken by the gas companies."

Without a knowledgeable attorney, landowners could get financially fleeced. For example, it remains uncertain exactly how abundant the natural gas resources are in North Carolina. These unknowns drive the leasing and royalty rates down compared with other states with long drilling histories. But even with these considerations, Treakle says Lee County landowners are not getting a square deal. Bonus payments—an upfront fee per acre for mineral rights—can run upward of $2,000 an acre in other states. Of the contracts Treakle says he has seen in Lee and Chatham counties, those landowners are being offered $1–$2 an acre.

Landowners also risk environmental liability. They can be on the hook for the company's draining nearby drinking-water wells, illegally discharging fluids and contaminated water into streams and rivers, and violating air quality standards.

"It's important to remember the landowner is impacted first," says Becky Ceartas, RAFI-USA program director. "Many of these rural areas need economic development, but not at the cost of air and water."

A man who owns property in Lee County, but lives elsewhere in North Carolina, signed a contract with WhitMar last year. (The man asked not to be named.) He provided the Indy with a portion of his contract dealing with water liability. It reads that if the water is adversely affected, WhitMar "will be liable at its own expense, to make every effort to return the water supply to as equal a condition as possible to pre-drilling condition."

Ceartas called this contractual language "slippery." The terms "adversely affected" and "make every effort" are broad and open to interpretation.

Ceartas says two bills pending in the Legislature—House Bill 242, which would call for a study of fracking's environmental impacts, and Senate Bill 709, which would require an environmental and regulatory review of fracking—need to contain language to protect landowners. Currently neither does.

The land-use pitfalls are also numerous. If the drilling company goes bankrupt, notes Ted Feitshans, an N.C. Cooperative Extension specialist and attorney in agricultural and environmental law, a landowner could be stuck with a half-finished well. The lease could be tied up in bankruptcy court, making the land difficult to sell.

Some landowners receive tax breaks on property used for agricultural, horticultural and forestry, as well as for conservation easements. Many of these uses legally conflict with gas exploration. If a landowner allows gas exploration, it could invalidate the exemptions, meaning he or she would have to pay three years' of back property taxes, says Susan Condlin, Lee County Cooperative Extension director, adding, "The only one looking out for your interest is you."

Energy companies can also leverage neighbors against one another in negotiating leases. The same Lee County landowner who signed with WhitMar last year told the Indy that a person with 300 acres adjacent to his property signed first.

"They're trying to get a block; they like to have these tracts," says the man, adding he didn't feel pressured to sign an agreement.

Many of WhitMar's current agreements in Lee County are with adjacent landowners. It makes business sense for companies to lease contiguous parcels; they can more easily run pipelines and roads across these leased lands. However, as ProPublica reported last week, landowners who decline to sign leases can still get ensnared in drilling deals.

"Forced pooling," the article explains, "compels holdout landowners to join gas-leasing agreements with their neighbors."

Meanwhile, the Lee County-based N.C. Oil and Gas is trying to persuade landowners to allow it to broker leasing deals as a group in return for a portion of the royalties.

"The leases we've seen here don't compare with the other leases throughout the nation," says co-founder Ray Covington, a Lee County native.

N.C. Oil and Gas contends it wants to bargain with the energy companies to make sure "our water and land is protected" and "to drill safely," Covington says.

N.C. Oil and Gas founders, including Russ Knight and Rob Knight, discount evidence that drilling can damage the environment, calling scenes from Gasland in which homeowners ignite methane-contaminated drinking water "scare tactics."

But scientific studies, including one released by Duke University earlier this month, conclude methane from drilling operations can—and does—contaminate drinking water. Dozens of official reports by regulators in other states have recorded incidents of illegal discharges of radioactive materials into wastewater treatment plants and fracking fluids into waterways.

But those reports don't faze Peggy Wyatt, who says she doesn't believe that WhitMar could pollute her land. She says she chose to sign with WhitMar after going to its Denver office while on a trip to visit her sister. "The office is a very, very nice place," she says, adding that her sister has leased a portion of her land in Denver to an energy company. "She has enjoyed profits from that. And I was all for getting money from it on my land."

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